An Investor Education and Awareness Initiative from HDFC Mutual Fund

ADVERTORIAL

THERE ARE VARIOUS BENEFITS OF INVESTING THROUGH

MUTUAL FUNDS WHICH MAY NOT NECESSARILY BE
AVAILABLE IF ONE INVESTS DIRECTLY IN SHARES
reating wealth is an
exciting proposition,
but the process of creating wealth requires
skill, knowledge, time
and the ability to stomach
risk. Investments, may
they be in direct equities
or through mutual funds,
have their advantages and
disadvantages. However,
direct equity investing, though
perceived as more dynamic by
investors, is feasible only for
those investors who are able to
understand the working of equity
markets and have the time to
track it regularly,
However, how about those
investors who are not equally
skilled and committed in terms of
devoting time and energy towards
their investments? For such
investors, the best option is to
choose the indirect route by
investing in mutual funds
(MFs).
There are numerous benefits
of investing through mutual
funds which may not be necessarily available if one invests
directly in shares. These
include:
PROFESSIONAL MANAGEMENT:
Individuals may not have the
necessary skills to identify the
right stocks. Sometimes they
cannot dedicate their time to do
research. Mutual funds offer
investors expert hands at work

THERE ARE SEVERAL ISSUES

ASSOCIATED WITH

DIRECT EQUITY INVESTING

INVESTING IN THE STOCK MARKET THROUGH

MUTUAL FUNDS IS COMPARATIVELY

LESS RISKY AND OFFERS MANY BENEFITS

returns for individuals. However

on a large portfolio, mutual
funds end up reducing costs.
FEES AND EXPENSES: For
their services, mutual funds
charge fund management fees
and expenses which are capped
under their regulations.
LIQUIDITY: Open-ended funds
allow investors exit at the prevailing NAV subject to exit
loads. This helps in financial
planning. When an individual
invests in shares, he is not sure
if he can sell the shares in the
market at fair value.
RISK MANAGEMENT: An individual may get carried away due
to sentiment and may go overboard on a particular stock.
However a fund manager cannot do so, since there are many
risk management guidelines in
place. There are limits on how
much a fund manager can
invest in each stock and each
sector. A fund managers decision to invest in a particular
share is backed by strong
research conducted by himself
and his team members.
CHOICE OF FUNDS: Investors
can choose to invest in a
scheme that suits their investment needs. For example, an
aggressive investor may choose
to invest in a diversified equity
fund, whereas a bit less risk
taker may opt for balanced
fund. There are funds catering
to almost all needs.
TAXATION: When an individual
investor buys and sells shares
before completing one year, he
ends up paying short term capital gains. However the fund
managers may keep transacting
in shares at varying intervals. If
investor remains invested for
more than one year in an equity
fund, his gains are tax free
since securities transaction tax
(STT) is already deducted.

ILLUSTRATION

HOW VINAY USED THE MF

ROUTE TO EARN MORE
Vinay wants to invest ` 1000
each in five stocks. Since collective investment like
mutual funds would work
better, he approaches five of
his friends Sachin, Raghav,
Manish, Shailesh and Kumar.
While the first three were keen to invest
` 1,000 each, Shailesh and Kumar agreed to chip
in with ` 500.

They appoint Santosh as their

fund manager

Santosh collects ` 5,000 in

total and issues units of
` 10 to each one of them.
This gives Shailesh and
Kumar 50 units each
whereas others get 100 units each.
As the fund manager,
Santosh buys one stock of
each of these bluechip
stocks on January 1. At the
end of the month, the prices
of these stocks change and
the portfolio value increased
to ` 5,250. After accounting for expenses at 1.5%
charged by Santosh for his services as fund manager, the value of each unit goes up to ` 10.3425.
This means that the valuation of investments by
Vinay and his friends also increased. Of course,
had the share prices fallen, the valuation of the
investments too would have fallen.
TABLE 1- HOW COLLECTIVE INVESTMENT WORKS
Price (`)
Stocks Santosh bought
Price (`)
as on Jan 1 as on Jan 31

ILLUSTRATION :DEBASISH SARMA

DIRECT EQUITY INVESTING

V/S MUTUAL FUNDS

that aims at achieving investment objective of the scheme.

LOW TICKET SIZE: As some
shares quote at very high price,
they remain inaccessible for
small investors. However one
can start in mutual funds which
invest in various such stocks
with as low as ` 500.
ECONOMIES OF SCALE: The
portfolio of an individual is relatively small as compared to a
mutual fund portfolio. This
leads to costs eating into

Technology Limited
Soap & Toothpaste Limited
Best Car Limited
Entertainment Limited
Infrastructure Limited
Total sum
Units issued
Value per Unit
Net Asset Value per Unit

1,700
1,250
450
500
1,100
5,000
500
10

*(post expenses @1.5%)

Returns on Investment

TO KNOW MORE, CONTACT YOUR FINANCIAL ADVISOR TODAY OR WRITE TO US AT investoreducation@hdfcfund.com

To read all the articles of INVEST-WISE series, please visit Investor Education > Downloads section on our website www.hdfcfund.com

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

Vinay
Sachin
Raghav
Manish
Shailesh
Kumar

`)
Investment (`
1,000
1,000
1,000
1,000
500
500

`)
Valuation (`
1,034.25
1,034.25
1,034.25
1,034.25
517.13
517.13

1,800
1,300
440
520
1,190
5,250
500
10.50
10.3425*